Analysts Question if NetZero Can Sustain Impressive Start
Never underestimate the power of free.
That’s the gospel the folks at NetZero Inc. are preaching, after the company rocketed to prominence as an Internet access provider just months after its founding last October.
The company hit 500,000 subscribers March 17--putting it into the top 10 of Internet service providers. Now, just three months later, NetZero boasts 1.2 million subscribers--and is moving to larger office space in Ventura County.
The company recently signed one of the largest office leases in the Conejo Valley this year.
Tony Principe, executive vice president of Westcord Commercial Real Estate Services, said the Internet company signed a 10-year lease on a 50,000-square-foot property off Townsgate Road in the Westlake section of Thousand Oaks.
Although company officials declined to comment on details of the move, the lease is worth an estimated $12 million and will accommodate NetZero’s future space needs.
How big can NetZero get? Company officials say the potential is limitless, but industry analysts take a more cautious view--saying the company must navigate tricky privacy and growth issues to get to the next level.
NetZero offers free Internet access and e-mail, in exchange for subscribers’ profile information, such as name, address, occupation and personal interests. That information is used to attract advertisers looking to target their products and services.
Although the company has sprouted quickly so far, analysts question whether it can sustain that kind of growth to challenge the dominance of Internet titans like America Online Inc.
“It would theoretically make sense for a Yahoo or AOL to offer free or severely discounted services to make a scheme like that work, because they already have the brand name,” said Drew Ianni, an online advertising analyst for Jupiter Communications in New York. “For NetZero and other brands, the challenge is going to be to get the resources to market the brand successfully.”
Still, Ianni said NetZero’s 1.2-million subscribers represent a significant market share.
“It shows that there is a demand. But, again, it will be a challenge to get to 3 million or 4 million. When you put everything into context, AOL will have 20 million [subscribers] by the end of the year.”
John Girard, vice president and research area director for Gartner Group Inc. in Stamford, Conn., said advertiser-supported Internet services may have a limited shelf life.
“I think this will attract a transient audience . . . [that] will replenish itself while the Internet is still a novelty,” he said. “But if the advertising and questionnaires are really intrusive, I think it is something people will move away from. The trick is finding what level of solicitation people will tolerate.”
Another concern is privacy, since NetZero subscribers must give up information about themselves to get the service.
“When you are dealing on the Internet, which has the capability to be interactive, you have to not only trust the company you are dealing with, but their partners as well,” said Gary Clayton, senior privacy analyst with Stone Investments in Dallas.
NetZero subscribers needn’t worry, said Mark R. Goldston, the company’s chairman and chief executive.
“We don’t give out names, addresses and telephone numbers,” he said.
Instead, he said, the company uses its technology to match advertisers with subscribers who have certain demographic characteristics. Members of the target audience get a moving, changing ad on a portion of their computer screen while they are signed on.
Subscribers to the service must answer questions about their age, income, personal interests and other subjects useful to advertisers.
NetZero’s database can keep track of 15 different demographic categories that can be mixed and matched, giving advertisers a variety of target audiences.
Through NetZero’s system, advertisers can also target consumers within a specific area code or geographic region, he said, opening Internet advertising to local businesses seeking consumers within their market area.
NetZero can also launch ads when a user visits a particular Web site. For example, an auto loan ad may appear when a user calls up a car dealership’s home page. Or a company’s ad could appear when a user logs on to a competitor’s Web page.
Company officials point out that the savings of a free service can be considerable. A household of three people can easily spend $750 annually on Internet services, for example, if each person has a separate account.
They also claim that the idea of free service is comparable to commercial television and radio, where listeners get free programming in return for putting up with a barrage of advertising.
Unlike TV, of course, advertisers using NetZero can target their products and services in ads that appear every 30 seconds on users’ computer screens.
“The original promise of the Internet was that it would be the ultimate in one-to-one marketing, but now it’s just a huge ocean,” Goldston said. “NetZero delivers on the original promise.”
The NetZero idea originated with Marwan Zebian, the company’s vice president of network and communications, in July 1997.
He was later joined by partners Ronald Burr, chief technology officer Stacy Haitsuka, senior vice president of research and development, and Harold McKenzie, vice president of software.
The company was funded with venture capital from sources including the respected Idealab Capital Partners of Pasadena. The company’s credibility rose another notch when GeoCities founder David Bohnett joined its board of directors.
The start-up’s rapid growth prompted its founders--all high-tech wunderkind--to bring in Goldston, 44, a business and marketing executive and founder of The Goldston Group, a business consulting firm.
“I want to continue to evolve the business [and] to evolve the technology to make it more powerful and relevant to the marketing community,” he said.
Since taking the reins in March, Goldston has solidified the company’s business plan, beefed up its online navigation technology and signed the Westlake Gardens lease.
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